Departmental heads often see cost modeling merely as a cost accounting function, regarding it as the finance department’s concern. This has been the traditional perspective of the organizations, giving little or zero importance to cost modeling. In reality, its high time businesses realize that cost modeling is way different from cost accounting and can drive cost saving opportunities and profitability.
Cost modeling can be defined as an advanced statistical model that provides accurate costs insights that enables the organizations to take strategic business decisions. It also helps in identifying the actual cost of a product or service by taking into consideration material costs, process costs, maintenance, repair and operations (MRO) costs and profit margin. It helps chief procurement officers (CPOs) in identifying the procurement costs and provides insights to improve the supply chains cost performance. These benefits are not just restricted to the procurement function but it applies to all the department functions within the organization irrespective of its size.
Cost Modeling and its benefits for you
Cost modeling not only helps in identifying costs drivers but also helps in strategic decision making. It is basically a cost estimator that finds widespread application in every function within the organization. How is this possible, you ask? Cost is the pivot around which every department functions and strives to reduce cost inefficiencies and drive profitability. Cost modeling is an effective, fast and reliable tool for the organization that helps the department function to achieve cost optimization and operational efficiency. Here are a few benefits of the cost modeling technique in every department function:
- Cost modeling is a boon for the product design and development team as it helps in determining the product life-cycle costs and optimizing product design by including suppliers in the initial process.
- It helps the sales and marketing function in evaluating the marketing effectiveness of promotions and campaigns, and building customer loyalty programs to acquire and retain them with the brand.
- It assists the operations function in estimating the manufacturing and production costs, preparing a distribution plan, and charting policies related to inventory, storage and product returns.
- For the finance department, it facilitates the analysis of profit and loss statement and the balance sheet, thereby determining costs implications on the capital expenditures.
- Cost modeling also helps predict and mitigate risks related to over allocating budget, excess spending thereby helps in better project management.
Organizations should realize the benefits of the cost modeling technique and should integrate it in every department to optimize costs and drive profitability. Department heads know for a fact that if they wish to create a competitive advantage and disrupt the market, they have to achieve cost efficiency. At SpendEdge, we provide granular supply market insights to organization that help them to make informed decisions, adopt a data-driven approach and drive cost saving opportunities.